Soft inflation makes Reserve's decision easy

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If the Reserve Bank decides to lift interest rates at its
meeting on Tuesday, it will surprise most economists and
market-watchers.

It is widely believed the central bank will leave rates
unchanged on Wednesday morning because there is no compelling
reason for it to act now.

This is particularly so after the latest inflationary reading,
the March quarter consumer price index (CPI), came in lower than
expected last week.

The Reserve Bank has a mandate to use interest rates to control
inflation.

But with the March quarter inflation rate indicating an annual
rate of 2.4 per cent, within the bank's 2 to 3 per cent target
band, the pressure for another rate rise is off, experts say.

It would also be seen as a big vote of no confidence in the
Federal Government if the bank were to lift rates a week before the
federal budget, although it would not be the first time this had
happened.

But rates are not indefinitely on hold.

While a few believe the central bank has entered a holding
phase, many still expect the Reserve Bank will need to lift rates
at some stage this year.

HSBC chief economist John Edwards said: "We think another
tightening is highly likely, perhaps as early as July. This
quarter's CPI increase does not reflect either the strength of the
Australian economy or the underlying price pressures."

Commonwealth Bank chief economist Michael Blythe said the
Reserve Bank had forecast inflation to head towards 3 per cent by
next year. Despite the weaker first-quarter reading, he believed
the forecast was about right and the bank would increase rates to
prevent this.

"While there is probably not enough weight of evidence to
support our May rate-rise call, we believe that a firm tightening
bias remains in place," he said.

With hindsight, the Reserve Bank's surprise move to lift rates
in March appeared to have been well timed, according to Mr
Blythe.

"If it has got the slowdown and reduction in inflationary
pressures it wanted with just one 0.25 percentage point rise in
interest rates," he said. "That's an exceptional outcome.

"But you've got to give the RBA credit. Over the last 10 years
we have had a pretty good ride and a lot of that is down to how the
RBA has handled interest rates."

Deutsche Bank chief economist Tony Meer said the central bank
got a 0.5 percentage point of impact from what was a 0.25
percentage point rise in March.

"They got a lot of media coverage and a blowtorch from the
politicians," he said.

"They got a lot of sticker shock, as much as they will ever get,
but whether this proves lasting or not remains to be seen."

Mr Meer said it was evident the domestic economy had slowed. But
he believed in six months the global economy would be out of its
soft patch, the Australian employment market would still be tight
and the Reserve Bank would be looking to "nudge rates up a bit
further".

Rory Robertson, interest rate strategist at Macquarie Bank, said
rates were more likely to go up than down from here.

He said those worried about higher rates should keep an eye on
the labour market. "The single-most reliable guide to interest
rates at the moment is the trend in the unemployment rate," he
said.

"The unbelievably strong jobs growth stands alone as the major
risk.

"The March rate rise came after the sharp fall in the
unemployment rate, from 5.6 per cent in September to 5.1 per cent
in January.

"But since then, the rate has been flat-lining. If the
unemployment rate falls further, the tightening bias will
intensify."

On the positive side, Mr Robertson believes unemployment has
bottomed, in which case the Reserve Bank may not need to lift rates
again. By next year, it may even be looking at lowering them, he
said.